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Wednesday, September 28, 2011

Economic Creation Myth

From the dawn of man until just a couple hundred years or so ago, humans lived a hand-to-mouth existence, with average global per capita consumption about $3 per day (in today's dollars). While there were important inventions over the millennia like the plow, paper, and gunpowder, and some of those inventions did boost production, they came relatively infrequently, and population growth kept humanity limited to its meager rations.

Suddenly, somewhere around 1800, the rate of innovation exploded, catapulting humanity away from the Malthusian limit and the average global per capita consumption is now $30 per day. And in the west, we've done far better, so much so that we consider consumption limited to a mere $30 per day to be mired in poverty!

The rapidity and magnitude of material progress can't be stated often enough or too strongly. At least an order of magnitude increase in average per capita consumption in less than a dozen generations! It's astounding and yet most people rarely consider it.

So how can we explain the creation of the goose that laid this golden egg of prosperity? Incredibly, nobody really knows and many narratives really don't fit history very well. As a result, we're each entitled to our own economic creation myth about where this prosperity came from. In fact, more than that, it's imperative that we form a framework to explain it because the Soviet Union and Communist China proved beyond a shadow of a doubt that it's possible to kill the golden goose.

Nobody knows what caused the exponential explosion of entrepreneurial endeavors, but there are a lot of things that we know didn't cause it. For example, it wasn't government funded education because there wasn't any; it wasn't government funded social safety nets because there weren't any; it wasn't socialism of any kind - Marx hadn't been born yet; it wasn't government funding of infrastructure - no increase (from very low levels) there; it wasn't government funding of research or development - no increase there either; it wasn't that suddenly civilization became stable or that urban population density reached a critical mass because China had both those characteristics for millennia; it wasn't because of an increased savings rate or capital accumulation - there's just no evidence for that; it wasn't just one or a handful of critical inventions - it was instead a massive number of incremental innovations in business process, trade, and lastly technology; it wasn't sudden discovery of natural resources as this was again very incremental; and it wasn't imperialism or slavery, in fact both waned as innovation exploded.

28 comments:

Well, sure, this post is at least partly a summary of the background for "Bourgeois Dignity: Why Economics Can't Explain the Modern World" by Deirdre McCloskey. I was hoping some folks would offer up their own creation myths before I pointed to hers.

Her creation myth, which I've pretty much adopted, is that for most of prehistory and history, commerce and merchants were consider vulgar, unclean, unholy, nasty, and lots of other negative things. During the last few hundred years, it finally started to become cool (she would say "dignified") to make money, and then everybody started to get in the act causing the huge acceleration in innovation and that is the goose that laid the golden egg of prosperity.

As far as the book goes, the concepts and evidence presented are fantastic, but unfortunately, she's one of these writers that will never use 1 word where she can figure out how to use 3, and that drives me crazy, so I don't actually recommend it unless you have a lot of time.

I think it was more the development of common law in the Anglosphere. For instance there was a recent article about Haiti and how it's desperately poor despite having clever and hard working people, who most likely think it would be quite "cool" to be rich. However, due to the lack of property rights and the consequence looting attitude of people with power, few are dumb enough to build a business.

I think the Anglospheric attitude, as most exemplified by the Magna Carta, that there are some things a government simply is not permitted, is the key development. Limited government, as opposed to psuedo-tribal totalitarianism, is the key element of our modern economic era. This is why I have so little patience for those who want to send us back to that state.

Note that "cool to make money" is radically different than "cool to be rich". One of the problems with Haiti is that it's cool to be rich so those with power take wealth by force as opposed to creating it.

While certainly a factor in the sustainability of rapid innovation, common law, though always evolving (still is), was around for quite a while before the explosion of innovation.

Yes, but things like common law and limited government take a while to filter down. I think we agree that the shift we are discussing requires action on the part of the masses and that it what distinguishes it from previous history. I find it hard to believe that among those classes there was much disdain for advancing one's self or family through hard work or "dirty jobs". McCloskey's argument seemed much more geared to explaining why the upper classes would become involved. And frankly, among those classes, I am not so sure that the old attitudes don't continue to prevail.

McCloskey tracks the literature and other historical evidence for many hundreds of years and discovers the trend from unclean, vulgar merchant to esteemed gentleman, with the changeover completing just before the explosion in innovation.

If you want to believe that common law evolved to the necessary point and that was the fundamental impetus to modernity, that's great. As I say, we can all have our very own creation myth because nobody knows for sure. It's impossible to know which came first, the chicken (common law that supported commerce to a sufficient extent) or the egg (desire to make money by a wide swath of the population).

James Watt, FRS, FRSE (19 January 1736 – 25 August 1819)[1] was a Scottish inventor and mechanical engineer whose improvements to the Newcomen steam engine were fundamental to the changes brought by the Industrial Revolution in both the Kingdom of Great Britain and the world.

You didn't answer the question. The steam engine was in existence and use before Watt's improvements and there were numerous improvements before and after Watts.

So is your economic creation myth that people were unable to accelerate the production of wealth until they noticed Watt's specific steam engine improvement and then suddenly, everybody started innovating like crazy?

The invention of the joint stock company? A tipping point in the rising expectation of limited government looting of the returns from investment without being of the Aristocracy of Pull? It would be interesting to see if there was a significant shift in that era from grants/patents from the crown to what we now call public companies which required no permission from politicals.

I definitely agree that it could've just been some sort of tipping point. It could've been some technological or business invention that pushed it past the tipping point or the slow trend from iron grip of the aristocracy to more economic freedom. Those are all fine economic creation myths.

But what appeals to me about McCloskey's view is that the cool ("dignified") to make money meme is a fundamental change that would lead to each of the tipping points. It just seems more fundamental. Why was the joint stock company invented? Because people wanted to make money and that became a useful innovation. Why was control wrested from the aristocracy? Because giving up a little control meant the people could make even more money to be taxed. Why was invention X, Y, or Z so important when the fundamental concept had been known for millennia? Because people wanted to make money and were now looking to utilize technology.

One thing to keep in mind is that, like life, this kind of thing will be created only once. After that the advantages are so manifest and direct that other systems can't compete (like the invention of aerobic metabolism). So it's quite possible it was just a random event which was then locked in.

I agree with the random event part, whatever the fundamental cause(s).

I disagree with the "locked in" part. I believe that the USSR and Mao's China proved that it could be unlocked. Depending on what the fundamental cause(s) of modern wealth creation are, Obama and the west may also be unlocking it.

That's why I think it's important to have an idea of how things got started. If it was just the invention of the steam engine, then hey, no worries, but then why did the Soviet Union go backwards? If it was that making money became cool, then Obama's class warfare might be a very bad thing.

But those are respectively a failed and a failing system. So it's just temporary (not to mention that ChiComs have moved rapidly back toward the modern world - did not Deng Xiaoping say "to get rich is glorious"?). More importantly, a revival will be just that, a revival, not a new creation.

However, in thinking about this reponse I remembered "The Bell Jar" by Hernando De Soto which has a different creation myth involving the legal regime and the legal evolution of several property. One could argue from that that McCloskey has the causation backwards - the acceptance of mercantilism was the result of its growing ability to make money, not the reason for it.

I haven't read the book, so could you tell me whether she looks at attitudes among the lower / middle classes, vs. the upper / elite classes?

Just temporary? If the U.S. had not been a counterbalance to the Soviets, the whole world would've ended up communist and the goose that laid the golden egg of wealth creation would have been killed.

I agree that one could argue that McCloskey has causation backwards and maybe you're right (again, I readily agree these are just myths - nobody really knows). However, it's more plausible to me that property rights would be strengthened in an atmosphere where people are interested in making money rather than out of the blue. On the other hand, narratives and ideology and memes are more spontaneous (in my opinion).

McCloskey looks at a wide range of writings that seem to capture the attitudes of representatives of all of the classes. She relies heavily on other historians and I'll admit I didn't trace down the quotes through the 100+ pages of references to see if she got it right.

The US was the steadfast long standing rock, not a counterbalance to the upstart Soviets who wouldn't have last a decade had the world lefties not decided to keep them propped up until Reagan showed up and showed them the folly of continuing the farce.

"If the U.S. had not been a counterbalance to the Soviets, the whole world would've ended up communist and the goose that laid the golden egg of wealth creation would have been killed."

No. It would have collapsed eventually and even inside the USSR there isolated pockets and areas of markets which would have prospered after the collapse.

"it's more plausible to me that property rights would be strengthened in an atmosphere where people are interested in making money rather than out of the blue"

I don't think property rights were strengthed out of the blue, I think the people involved had a clear idea of why exactly they wanted that. That's why I pointed at the Magna Carta which demonstrates that desire long before the mercantile revolution. Granted, it was just the nobles at the time but that idea caught on and spread downwards over the next few centuries, culminating in the creation we are discussing.

I am currently reading "1688" which discusses the Glorious Revolution in England. This book casts it not as revolution but a struggle between two new visions of the State - what we could call Socialism (state directed economic activity) and Market (individually directed). The Market forces won.

So how can we explain the creation of the goose that laid this golden egg of prosperity?While my answer of James Watt was somewhat tongue in cheek, it is also basically true. Without the wide availability of concentrated energy, global per capita consumption would still be about $3 per day.

and

What caused the "exponential explosion of entrepreneurial endeavors"? Until Watt, there wasn't; post-Watt, there was. England, legally and socially, scarcely changed over the 40-ish year period, but that is just reiterates what I already said. Rather, your question should be: "After 1800, why did some parts of the world see orders of magnitude increases in per capita consumption, while others didn't?"

You are right, nobody knows for sure.

However, there is a way of narrowing the universe of possible answers, by eliminating from consideration those things that are antagonistic to entrepreneurial endeavors. E.g., tribalism, lack of property rights, confiscatory taxation, pervasive state intervention in the market, tsetse flies, etc.

Also, it is worth noting that the conditions that existed at the start of the productivity explosion aren't necessarily consistent with its continuance. For instance, there was almost no gov't funded infrastructure at the time, but there is now. How would the US's productivity change without interstate highways, or everything required for the aviation system? It wouldn't get better, and it is hard to imagine how either of those things come about absent government spending.

Two good books are Wealth and Poverty among Nations, and The Rational Optimist.

Susan's Husband wrote: "[The USSR] would have collapsed eventually ..."

It's always tough to know what happens in an alternate universe, but my bet is that collapse without widespread prosperity somewhere (the U.S. is also communist in this scenario) would've basically put the world back in the dark ages for another few hundred years. In addition, those "isolated pockets" of prosperity in the USSR mightn't've existed without western goods. That's just my guess.

Hey Skipper wrote: "It wouldn't get better, and it is hard to imagine how [interstate highways or aviation system could] come about absent government spending."

That's interesting, because I have trouble imagining how both those things wouldn't be oh-so-much-better without government involvement, especially the aviation system which has less need for getting right-of-way access. So you really think that things like the TSA make aviation that much better?

So you really think that things like the TSA make aviation that much better?

WTF does the TSA have to do with aviation?

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The rest of the world is a mish-mash of aviation fiefdoms which, despite the International Civil Aviation Organization, are a major pain to deal with. Imagine that at the US level without the overarching FAA. And even that doesn't get you there, because you are presuming a system without any gov't involvement at all.

I think it is possible to classify problems. Some classes are best solved by the market, a few by government, and the rest might very well have no solution whatsoever (hello, CRA).

Bret, FDR did the best he could, but Truman didn't have the guts to continue his work and then came Ike and more alternating between left and less left presidents until Reagan. Wilson would have been the bigger danger because at that time few ordinary citizens thought of communism as a danger to us. By the beginning of the Second World War, that had changed a lot.

Do you think Perry can overcome his grandfather's crime of leasing a property that had a rock long ago painted over and even turned over identifying the property's name with a word that has, since those days, become radioactive?

I liked Cain until he retracted his first and IMO correct reaction to the ridiculous brouhaha.

I'll vote for the Republican candidate, but I'm afraid a lot of people are already saying they'll stay home and not vote.

Either a Hillary or Obama victory will put us in such a vulnerable position, I don't know if we will be resilient enough to recover from it.